(From Canada's Globe and Mail newspaper, Monday edition.)
By Kevin Carmichael
Of THE GLOBE AND MAIL
WASHINGTON (Globe and Mail)--The International Monetary Fund says the
near-term fate of the global economy will be determined by policy
makers in Europe and the U.S., an uncomfortable prospect given the
recent performance of politicians in capitals such as Berlin, Madrid
and Washington.
Global economic growth has lost momentum since a sharp rebound from
the financial crisis in 2010, as the euro zone debt crisis turned into
a recession and political gridlock in the U.S. left the Federal
Reserve to support the recovery without an assist from fiscal policy.
The IMF said Monday that the world economy will expand 3.9 per cent in
2013, compared with an estimate of 4.1 per cent in April, as a
contraction in the euro area diminishes global trade and uncertainty
about future tax and regulatory policy undermines confidence in the
United States.
Europe's struggles are the primary cause of the world's economic
decline, and resolving the crisis is the "utmost priority," the IMF
said.
In 2010, global GDP expanded 5.3 per cent, after contracting in 2009.
After a promising start this year, the global economy has deteriorated
steadily, and the IMF now sees little chance of momentum returning any
time soon. The greater risk, however, is that politicians and central
bankers might fail to keep things from getting even worse.
"Downside risks continue to loom large, importantly reflecting risks
of delayed or insufficient policy action," the fund said.
The faltering global economy is limiting Canada's prospects by
crimping global trade and commodity prices. The IMF predicted the
average of crude prices will decline 2.1 per cent in 2012 after
surging by about 30 per cent in each of the previous two years.
That means lower profits for Alberta's oil patch - and potentially
less investment and hiring. The fund left its outlook for Canada's
growth essentially unchanged at 2.1 per cent this year and 2.2 per
cent in 2013.
In Europe, Italy and Spain - the third- and fourth-biggest economies
in the euro zone - are facing significant recessions that will stretch
into 2013, according to the IMF. The combined GDP of all 17 users of
the euro will contract 0.3 per cent in 2012 and rebound by only 0.7
per cent next year, the IMF said.
Recent decisions by European leaders to use their rescue fund to
stabilize banks in Spain and create a single supervisor for the
region's biggest lenders hold promise, the IMF said. But there is more
to do, including structural changes that would boost economic growth
and a pan-European deposit insurance guarantee.
The European Central Bank also has room to further ease monetary
policy, the IMF said. The ECB two weeks ago dropped its benchmark
lending rate a quarter-point to 0.75 per cent, the lowest ever, and
told lenders it would no longer pay interest on deposits, a measure
meant to prod bankers to lend rather than seek shelter at the central
bank.
Another worry is Washington, where Republican and Democratic lawmakers
show little sign they will soon resolve the "fiscal cliff," a
combination of tax increases and spending cuts worth more than
$600-billion (U.S.) that are legislated to take effect in 2013. That
amounts to a contraction equal to 4 per cent of GDP, which would be
the biggest in four decades, said Hamilton Place Strategies, a
Washington-based advisory firm.
The U.S. must narrow its deficit: Last year, Washington spent 24.1 per
cent of GDP and collected only 15.4 per cent of GDP in revenue,
compared with historical averages of 19.7 per cent and 17.7 per cent
respectively.
But the IMF says the U.S. economy is too weak to absorb the fiscal
shock currently on the books. Failure to moderate spending and tax
plans could cut U.S. growth by as much as 4 per cent - more than
enough to cause a recession, Olivier Blanchard, the IMF's chief
economist, told a press conference. A decline of that size in the
world's largest economy would reduce global GDP by 1.5 per cent.
"We are talking possibly an enormous shock," Mr. Blanchard said. "If
this were to happen, it would be a major, major event."
www.theglobeandmail.com
(END) Dow Jones Newswires
July 16, 2012 21:00 ET (01:00 GMT)
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